India fails to break deadlock on new sales tax

NEW DELHI (Reuters) - Indian Finance Minister Arun Jaitley’s plan to launch a new national sales tax next April got a jolt on Saturday after a two-day meeting with state officials ended without the resolution of a deadlock on who would administer the tax.

India's Finance Minister Arun Jaitley gestures as he addresses a gathering during a seminar on 'Income Declaration Scheme-2016' in Ahmedabad, India, July 10, 2016. REUTERS/Amit Dave

The long-awaited Goods and Services Tax (GST) would transform Asia’s No.3 economy into a single market, could boost revenues through better compliance and make life simpler for businesses that now pay a host of federal and state levies.

But a council of federal and regional authorities has been struggling to forge a consensus on how to collect the new tax that will have federal and state elements.

Jaitley doesn’t favor dual agencies auditing and scrutinizing each taxpayer as he reckons multiple authorities could end up acting at cross-purposes. But states are reluctant to cede their turf.

While federal and state finance officials will meet again on Dec. 11-12 to discuss the issue, the possibility of a breakthrough at the meeting was not bright.

“I will keep my fingers crossed,” Jaitley told reporters after meeting his state counterparts. “The day we resolve it, I would say it’s a done deal.”

For the GST to come into operation from April 1, Indian parliament as well as state legislatures, must pass, in all, four legislations before the end of this year.

Parliament’s winter session is due to end on Dec. 16, but the bills can be brought before it only after the council approves them.

Adding to the uncertainty, some states in the council raked up the issue of compensation for revenues they fear losing following the GST launch as well as Prime Minister Narendra Modi’s crackdown on the cash economy.

Modi’s decision last month to scrap 500 rupee and 1,000 rupee banknotes at a stroke as part of a crackdown on tax dodgers and counterfeiters has left companies, farmers and households all suffering.

Jaitley has agreed to compensate loss-incurring states in the first five years of the new tax regime. But states are now equally worried about the economic fallout of the so-called “demonetization” drive which could hurt their finances.

“All states are deeply concerned about their revenues falling,” said West Bengal’s finance minister Amit Mitra. “Compensation in future may become huge.”

Under a constitutional amendment that enabled the GST, India needs to roll out the new sales tax by mid-September when the old system of indirect taxation is due to lapse.

Reporting by Rajesh Kumar Singh; Editing by Toby Chopra